Reaching altitude

Reaching altitude.  Stocks closed down yesterday on trade talk uncertainty.  The Dow Jones closed up slightly as Boeing announced that MAX deliveries will restart next month.

 

MY TWO CENTS

 

1. A tight, tight rope.  As we enter the final weeks of the trading year, investor sentiment remains positive, if not hopeful.  The S&P500 is up +23.14% year to date and we are entering a period in which stocks historically perform well.  Major indexes remain right around their all time highs despite a mounting heap of negative factors.  In fact, if one compared high level downside risks to upside drivers, an unbalanced ledger would be the result.  Let’s indulge.  In the risk column we have a global economic slowdown, a trade war between the worlds two largest economies, an ugly divorce between the UK and the EU, an impeachment trial, election year in the US, a shrinking manufacturing sector, a contraction in corporate earnings (this quarter, S&P500 earnings growth is negative for the first time since 2015), a growing federal deficit, and a potential government shutdown.  In the upside column we have a concerned Federal Reserve which has pledged to stay vigilant having just lowered interest rates by -75%, strong employment, and stable prices.  The Fed easing will help consumers and companies borrow money at a lower cost which should, in theory cause them to keep buying.  It appears that there is more downside risk than upside potential. Looking at the VIX index, which is used as a measure of investor fear, we see that it has remained below 15 for over a month and sits right around the low for the year.  This means that investors are complacent and are hoping for the best.  In the short term the risks remain high and a scary tweet could easily upset this great bull run.  For the longer term things look less risky and a diversified portfolio will prevail, as it always has.

 

2. All ships rise with the tide.  Yesterday’s market action, particularly amongst the major equity indexes, highlights the importance of knowing what you are investing in.  The Dow Jones Industrial Average is one of the most followed equity indexes in the world.  It consists of 30 large US companies and was first published by Charles Dow and Edward Jones in May, 1896.  Unlike the S&P500 which is a capitalization weighted index, the Dow is a price weighted index.  A price weighted index favors components with higher prices.  For example, a company with a $100 stock price would be weighted 5 times more than a company with a $20 stock price.  The component companies of the index are selected by S&P Global, which is a part owner.  The oldest remaining stock on the index is Exxon Mobile which was added in 1928, and the newest addition is Dow Chemical, added earlier this year.  Apple was added in 2015 and joined tech giants IBM, Intel, Microsoft, and Cisco Systems.  The makeup of today’s index covers a broad array of sectors, making it less a representation of heavy industry than originally intended.  Yesterday, all of the major stock indexes were down except for the Dow, which managed to close up by +0.04%.  The reason?  Boeing, with a stock price of $366.96, is the most heavily weighted component on the index (8.99%).  Yesterday Boeing (BA) announced that it will resume deliveries of its 737 MAX in December.  In response to the good news, the stock rose by +4.55%, pulling the Dow Jones Industrial Average up with it.

 

THE MARKETS

 

Stocks sold off yesterday on negative trade comments from the President and increasing violence in Hong Kong.  The S&P500 fell by -0.20%, the Dow Jones Industrial Average rose by +0.04%, the Russell 2000 slipped by -0.26%, and the NASDAQ Composite Index traded off by -0.13%.  The bond market was closed yesterday in honor of Veteran’s Day.

 

WHAT’S NXT

 

– Fed Vice Chairman Richard Clarida, Philadelphia Fed President Patrick Harker, and Minneapolis Fed President Neel Kashkari will all speak today.

– President Trump will speak at the Economic Club of New York at 12:10 EST. He is expected to discuss trade negotiations with China, so we can expect some market volatility around the speech.

– This morning DR Horton and Advanced Auto Parts beat expectations while Sage Therapeutics missed.  Before the bell, we will hear from CBS and Rockwell Automation.  After the close earnings include SmileDirectClub and Skyworks Solutions.

– Please refer to the attached weekly economic and earnings release calendars for details.

 

Southern Exposure

 

I will be meeting clients in our Boca Raton and Miami offices later this week.  Please reach out to set up some time to visit.

daily chartbook 2019-11-12

econ numbers 11_11

earnings releases 11_11